Debate on the Local Government Finance Settlement 2025/26, House of Commons, 5 February 2025

• The extra funding for councils next year will help councils meet some – but not all – of the pressures we face in adult and children's social care, homelessness prevention and support for children and young people with special educational needs and disabilities. Councils of all types will continue to struggle to balance the books next year with many having to increase council tax bills to bring in desperately needed funding but still being forced to make further cuts to services.
• Different councils are affected by the settlement in different ways. For some councils this is a good settlement, and they will welcome the extra resources including the Recovery Grant. However, other councils will be concerned about the repurposing of grants such as the Rural Services Delivery Grant and the Services Grant and the Government’s use of a different method to allocate some additional funding next year. 
• Whilst it is good that the Government has provided details of how it will compensate councils for the costs they will face through increases in employer National Insurance contributions (NICs), the £515 million allocated to the sector (of which £13 million is for combined and county combined authorities) still falls short of the £637 million we have estimated it will cost councils next year due to directly employed staff. We have also warned that indirect NICs cost increases, through commissioned providers, will cost councils up to an extra £1.13 billion next year. While we are pleased that councils will receive extra social care funding, which will help towards these indirect costs, it is hugely concerning that employer NICs costs have not been fully funded. As we have warned alongside more than 100 organisations, this will exacerbate the already unsustainable pressures facing vital services.
• Councils continue to face severe cost and demand pressures, and the Spending Review will be critical to the future of our local services. We welcome the Government's commitment to provide councils with multi-year settlements as part of that process, but it must include significant and sustained increases in overall funding for councils. However, this alone will not address the multiple issues with the way local services are funded. Our recent joint report with Solace and CIPFA makes the case for reforming council finances, focussing on the steps that need to be taken to help councils balance their books annually. Councils stand ready to work with the Government on creating an improved and a more sustainable future funding system that works for all of local government.
• We are disappointed that the Public Health Grant for 2025/26 has not yet been announced. We hope to see better alignment of timing between the Provisional Local Government Finance Settlement and the Public Health Settlement in the future.

• Councils’ financial pressures and needs must be seen in the context of the huge contribution that councils already make and of their potential to do more to support the delivery of public services.
   
• Despite the financial pressures councils have faced since 2010/11, the vast majority have met their statutory responsibility to balance their books annually. But this does not mean that services remain unchanged and sustainable:
   
  • Council spend is increasingly concentrated in fewer services and on fewer people.
     
  • There are growing concerns over the quality and scale of service provision.
     
• Increasingly unsustainable workforce challenges.
   
• Reduced spend on preventative services.
   
• These outcomes show that simply keeping councils on a financial drip feed has not prevented the steady narrowing and weakening of council services.
   
• Councils need a significant and sustained increase in overall funding to stem the emerging risk of system-wide financial failure and to ensure that councils can meet growing demand for the vital services needed by their communities. But additional funding alone will not address the multiple issues with the funding system. There is growing evidence that the wider local government revenue funding system itself desperately needs reform.
   
• The local government funding system has not been subject to significant reform since the introduction of 50 per cent business rates retention in 2013/14. It is opaque, overly complex and out of date. Councils have been operating in a dated, patched-up system where financial planning is hindered by a drip feed of one-year finance settlements, and financial sustainability is increasingly secured by one-off grants or Exceptional Financial Support from Government. These arrangements act as barriers to councils making innovative and meaningful decisions, limit their ability to focus on long-term strategic and economic planning, and undermine their financial sustainability.
   
• The Secretary of State for Housing, Communities and Local Government (and Deputy Prime Minister) acknowledged at the LGA Councillors’ Forum in July 2024 that there is a need to reform the funding system and address its inefficiencies. They have committed to multi-year settlements and the Government is currently consulting on changes to the system that underpins the Local Government Finance Settlement.
   
• We believe there is a need for a cross-party review of, and debate on, options to improve the wider local government finance system. This has to include a review of council tax alongside other council funding sources, and whether business rates retention represents a viable future funding model. We should look to build a sector-wide consensus on the nature of any proposed reform.
   
• However, the pressing nature of the sector’s financial problems means there is not the time simply to wait for wholesale reform to be designed and delivered. Change is also needed in the short-term to ensure service and financial sustainability of the sector. Further information on how to improve the wider system of local government revenue funding can be found in our report Reforming the local government funding system in England and in the section below on other ways to improve the local government finance system.
   
• Councils need to be given greater freedom to respond to financial and service challenges. Creating a more sustainable funding system for local government has the potential to strengthen the value for money of local spending and, most importantly, improve outcomes for the people and places councils serve. A financially robust local government sector also has the potential to reduce costs falling on other public services and to support the more efficient delivery of key Government agendas such as economic growth, crime reduction, supporting early years and education provision, delivering net zero and supporting the NHS. Ensuring local government is financially stable is fundamental to any Government being able to deliver its wider policy objectives.

• The main features of the Local Government Finance Settlement are:
   
  • Confirmation that Core Spending Power will rise by 6.8 per cent in 2025/26 including Revenue Support Grant increasing in line with CPI inflation. This compares with a 6 per cent increase at the Provisional Settlement. The increase amount largely relates to the inclusion of compensation for employer National Insurance increases in Core Spending Power and £20 million more for the Children’s Social Care Prevention Grant.
     
  • A combination of new funding and the repurposing of certain grants – Rural Services Delivery Grant and Services Grant – used for:
     
    • A £880 million increase in the Social Care Grant compared with 2024/25. 
    • A £600 million ‘Recovery Grant’ for places with “greater need and demand for services (using deprivation as a proxy) and less ability to raise income locally”.
       
  • A new £270 million Children’s Social Care Prevention Grant, increased from £250 million at the Provisional Settlement.
     
  • £515 million currently outside Core Spending Power for the costs associated with the increase in employer NICs. Of this, £502 million will be allocated to councils and £13 million to combined and county combined authorities.
     
  • £121.1 million for a funding floor which protects all local authorities from a year-on-year reduction in Core Spending Power. This goes to 132 councils, all of which are shire districts.
     
  • A core council tax referendum limit for local authorities of up to 3 per cent and an adult social care precept of 2 per cent for all local authorities responsible for adult social care. For shire districts a referendum principle of up to 3 per cent or £5, whichever is higher. 
     
  • The Government announced additional council tax flexibility for: Windsor and Maidenhead Borough Council (+4 per cent); Birmingham City Council (+2.5 per cent); Bradford Council (+5 per cent); Newham Council (+4 per cent); Somerset Council (+2.5 per cent); and Trafford Council (+2.5 per cent). This is outside of Core Spending Power.

• An increase in council tax of up to 5 per cent will place a significant burden on households particularly during a year of economic uncertainty. In addition, increasing council tax raises different amounts of money in different parts of the country not related to need.
   
• It is disappointing that the Government has continued to rely on council tax and the social care precept, alongside grant, to fund adult social care. Council tax is not the solution for meeting long-term pressures facing high-demand national services such as adult social care. The assumption that not only the adult social care precept but also a substantial part of any council tax uplift should fund adult social care leaves little for other council services on which all residents depend.
   
• We agree that shire districts should have extra council tax flexibility but would propose a limit of £10 rather than £5. 
   
• We have always maintained that the council tax referendum limit should be abolished so, in due course, alongside the completion of the fair funding review or its equivalent, councils and their communities can decide what increase in council tax is warranted to help protect or improve local services.

• The methodology for allocating settlement funding and Revenue Support Grant (RSG) remains unchanged from previous years. The LGA considers that both the formulas and the underlying data used for the assessment of relative needs and resources need to be reviewed and the Government should provide sufficient funding to ensure that no council experiences a loss of income.
   
• Councils affected will welcome the cancellation of negative Revenue Support Grant.
   
• We welcome compensation for councils due to the decision to freeze the small business rates multiplier, however this removes buoyancy from the business rates system, and without alternative means of funding or compensation, council income would reduce in the medium term.

• Different councils will have contrasting views about the introduction of the Recovery Grant. It is vital that the Government ensures all councils have adequate resources next year to provide the services their communities rely on every day and can meet growing and complex cost and demand pressures.

• Additional funding for social care is helpful, but LGA analysis shows that prior to the Autumn Budget children’s and adult social care faced additional cost pressures of £3.4 billion in 2025/26 compared to 2024/25. This ongoing shortfall puts services for children and adults at risk, and severely limits councils’ ability to support the Government mission to break down barriers to opportunity. It also jeopardises full realisation of all the ambition in the Health Mission (and 10 Year Plan for Health). The grant increases will help but they will not close the gap.
   
• The additional funding must also be seen in the context of the announced increases to the National Living Wage and employers’ NICs. The additional £515 million to compensate for increases in NICs falls short of the £637 million we have estimated it will cost councils next year. Care providers will likely expect to see their increased costs reflected in their fees paid by councils. NICs cost increases, through commissioned providers, will cost councils up to an extra £1.13 billion next year. While we are pleased that councils will receive extra social care funding, which will help towards these indirect costs, we remain deeply concerned about the impact the NICs rise will have on the organisations that the sector relies on to deliver vital care and support, especially smaller charities and providers. As we have warned, alongside more than 100 organisations, this will exacerbate the already unsustainable pressures facing vital local services.
   
• It is critical that the Government uses the final settlement and the 2025 spring’s Spending Review to provide councils with a significant and sustained increase in overall funding that reflects current and future demands for services. This must include a new focus on prevention, reducing the need for later acute and reactive spend and enabling people to live fulfilled, happy and productive lives, as well as reducing socioeconomic inequality and poor health.
   
• We also welcome the resources in the new Children’s Social Care Prevention Grant and note that it will be specifically targeted at new burdens in the Children’s Wellbeing and Schools Bill relating to the national roll-out of Family Help and that the £13 million uplift at the final settlement will be used to rollout mandatory Family Group decision making. This will limit local flexibility.
   
• We note that the Children’s Social Care Prevention grant will be distributed by a new children’s needs-based formula, which will allocate funding according to estimated need for children’s social care services. Individual councils will have views on the distribution method. New burdens represented by these duties must be fully covered.

• The New Homes Bonus makes up a considerable part of funding for some councils, particularly shire district authorities. Councils need clarity on the future of the New Homes Bonus following a consultation in 2021. Any changes should come with transitional funding to ensure that local authority services that residents rely on are not put at risk.
   
• Any future housing incentive should be easy to understand and easy to evidence and include provision for affordable housing and energy efficient homes. It should not be funded from a settlement top-slice. 

Simplification of grant funding streams

• Alongside the introduction of greater funding certainty there should also be a move away from piecemeal pots of funding allocated through wasteful competitive bidding processes. Research published by the LGA in 2020 found that there were nearly 250 different grants provided to local government, around a third of which were awarded on a competitive basis. LGA research estimated that the average cost to councils in pursuing each competitive grant was in the region of £30,000 costing each local authority roughly £2.25 million a year chasing down various pots of money across Whitehall.
   
• Regardless of whether grants are allocated based on need or through competitive bidding Government should look to reduce the use of formal ring-fences and grant conditions. The steady return of grant conditions undoes much of the progress made in the early 2010s when the Government removed ring-fences and combined individual grants into larger ones to reduce reporting burdens and provide flexibility to councils in how they used funding (National Audit Office, 2014).
   
• The Ministry of Housing, Communities and Local Government (MHCLG) recognised this as an issue and introduced a funding simplification doctrine in 2023. The current Government has committed to consolidate funding streams into the settlement, reduce the overall number of grants to local authorities and to work to end competitive bidding processes and cut burdensome reporting requirements. This is welcome and needs to be implemented with urgency.

Adding flexibility to current funding streams

• Over 70 per cent of council revenue income currently comes from three sources; council tax, retained business rates and sales, fees and charges income.
   
• The efficacy of all funding sources and possible options for their reform must sit at the heart of the debate on long-term reform of council funding. But while this discussion takes place there are options for smaller scale reforms to these core funding sources that will be of value to councils.

Council tax

• There are key areas where Government could act to add greater flexibility within the current council tax system:
   
  • Council discretion over rate setting: The rate is set by councils, but they have limited discretion due to centrally-set referendum limits that restrict annual increases in the rate.
     
  • Discounts and exemptions: The local revenue raising potential of council tax is significantly diminished by discounts and exemptions, most of which are fixed nationally. The mandatory single person discount, for instance, covers almost a third of dwellings. This discount is not means tested and, according to the IFS, encourages the inefficient use of property (IFS 2020). The Government should therefore give councils the powers and flexibility to vary all council tax discounts.
     
  • Unbuilt properties: Council tax is only payable on properties classed by the Valuation Office Agency as dwellings. For example, there is no council tax payable on properties not on the list because they are undergoing reconstruction or are being rebuilt. This can result in delays in councils receiving income from new or reconstructed dwellings after planning permission is granted.

Business rates and business rates retention

• In October 2024 the Government published a discussion document which sets out the Government's priority areas for reform of the business rates system. The LGA will be responding to this call for views.
   
• The Government is introducing new multipliers for retail hospitality and leisure, paid for by a higher multiplier for premises with rateable values above £500,000, to apply from 2026/27. This is provided for in the Non-Domestic Rating (Multipliers and Private Schools) Bill currently before Parliament. However, the Government has no plans to extend the powers to set lower or higher multipliers to councils. The LGA would like to see powers to vary the multiplier, and mandatory reliefs, given to councils.
   
• We would also like to see more powers and flexibility to tackle business rates avoidance given to councils. The LGA estimated in 2019 that this costs £250 million per year. The Government has promised to consult on a General Anti Avoidance Rule – we would like to see this published and implemented as soon as possible.
   
• As part of the Local Government Funding reform consultation published in December the Government has announced its intention to ‘reset’ the business rates retention system from 2026/27. Further details are expected in a forthcoming technical consultation that is expected to cover the delivery of a reset and the methodology of updating business rates baselines. This will be the first reset since the business rates retention system was introduced in 2013 and could have a significant financial impact on some local authorities. A business rates reset will not in itself add flexibility but councils need certainty on the reset of the business rate retention system.
   
• It is important that the Government introduce a transitional mechanism as part of any business rate reset to ensure that local authority services that residents rely on are not put at risk.

Sales, fees and charges income

• In 2022/23 sales, fees and charges generated over £12 billion in income for councils, roughly similar to the amount generated through the retained business rates system. But despite the significance of this funding stream, councils do not have the ability to set fees for many crucial areas of their activity such as planning.
   
• Sales, fees and charges need to be fully localised, including road user charges and workplace parking levies. Councils also need the flexibility to set planning fees at a local level so that can they cover their full costs relating to planning. This would help to future-proof the sector and ensure planning departments can continue to support the delivery of much-needed new homes, including the affordable homes and infrastructure that the country needs.

Arian Nemati (Public Affairs)

[email protected], 07799 038403